September 5th is the International Day of Charity. The day was declared by the UN General Assembly in 2012 and is dedicated to the goals of helping disadvantaged members of our community and promoting charitable activities.
A Sense of Well Being
There is great reward in helping others in need. One of our Core Values at High Falls Advisors is to “Step into the Breach” for those who are less fortunate. An investment of time and interest in another person could possibly change the direction of their life and the lives of their family members.
Releasing the Full Potential of Giving
We know giving is good, but are there other advantages to giving? The primary additional benefit of giving is tax savings, but with recent changes in tax rules, a good understanding of how to maximize the potential of giving is important.
First, charitable giving and activities have many forms, such as:
- Providing financial support
- Volunteering time
- Donating goods and household items
Charitable contributions are allowable as an itemized deduction. The most common itemized deductions include real estate taxes, state income taxes and mortgage interest. When preparing your return, total your itemized deductions and compare them to your standard deduction, then deduct whichever amount is higher. For the 2022 tax year, the standard deduction is $12,950 for single filers and married filing separately, $25,900 for joint filers and $19,400 for heads of household.
If you utilize the standard deduction, you are not getting a tax advantage for your charitable contributions. In 2021, a single individual could deduct $300 and a married couple filing joint could deduct $600 of charitable contributions as an adjustment to gross income. This provision expired in 2021 and was not extended for 2022.
How to Maximize the Tax Advantages of Charitable Giving
There are several strategies you can use to maximize the tax advantages of charitable giving. You need to consult with your personal tax advisor to determine which of these strategies make sense for you. We will provide some additional details on Qualified Charitable Distributions (QCD).
- Bundle your contributions into one year with the goal of exceeding your standard deduction.
- Donate appreciated assets. Low tax basis stock or investments are a good choice here since you can deduct the fair market value of the investments and avoid paying income tax on the capital gain.
- Utilize a Qualified Charitable Distribution (QCD). A qualified charitable distribution (QCD) allows you to make a charitable contribution from your Individual Retirement Account (IRA) income-tax free.
You don’t have to include the distribution as taxable income and you are not entitled to deduct it as a charitable contribution. This strategy is very useful when you are receiving required minimum distributions (RMDs) from your IRAs. QCD is a very popular strategy, but several rules apply:
- You must be age 70½ or older and make your contribution after you’ve reached that age.
- The annual limit per person per year is $100,000. Each spouse of a married couple can contribute $100,000.
- Qualifying accounts include IRAs, Roth IRAs, SEP (Simplified Employee Pensions) and Simple Plans. Your SEP of Simple Plan will not qualify if you or your employer are still making contributions to it.
- The contribution must be a direct transfer to the charity. You can’t take a distribution from your IRA, decide to write a check to the charity and treat the distribution as tax free.
What Should I Do Next?
Charitable giving has many advantages and there are smart ways and creative strategies to accomplish it no matter how much you contribute. High Falls Advisors has many tools and strategies for you to consider. If you would like to meet with a Financial Advisor to establish your charitable giving plan, please contact us to schedule a meeting.